Liberty Media Corp. is going for broke in the bidding for Vivendi Universal Entertainment, and in ways that may be surprising to some, it could eventually bring NBC along for the ride.
A winning bid for VUE-which could cost upward of $15 billion, including debt assumption, half of which could be in cash-will help Liberty redefine itself from an investment-oriented to more of an operating-oriented holding company that can play a pivotal role in shaping digital content production and distribution.
It is the deal Liberty must do.
VUE’s USA and Sci Fi cable networks and Universal Studios, coupled with Liberty’s 100 percent-owned Starz Encore and 50 percent-owned Discovery Communications, will provide the well-connected Liberty with enough scale to join the content elite that includes The Walt Disney Co., News Corp., Viacom and AOL Time Warner. Liberty is widely considered to have the best strategic and financial wherewithal to win the VUE auction.
Based on interviews with Liberty Chairman John Malone, NBC Chairman Bob Wright and others, I have been reporting since January that Liberty and General Electric’s NBC consider a VUE deal critical to their transformation as more formidable next wave media players. Both companies are concerned about losing distribution and content clout and not having enough influential assets and scale to compete in a consolidating media world.
NBC is considered by many on Wall Street to be the other “best” bidder for VUE. Although GE is only willing to bring several billion dollars of cash to the table upfront as part of its initial bid, it brings other elements that could be far more important and that are widely underestimated.
GE and Mr. Wright are offering Vivendi Universal Chairman Jean-Rene Fourtou the opportunity to have a stake in a media entity that would combine VUE with NBC’s powerful broadcast and cable networks and TV stations, over which GE would have majority ownership and control. High-level sources tell me it has not been decided whether Vivendi would receive GE stock or a new stock created from the public spinoff of the combined media assets, which also is an option GE is willing to consider. It would be the kind of appreciating stock that Vivendi could sell for a profit over time.
GE also has the deep pockets in place to offer Vivendi additional cash payments over time and to assume Vivendi’s existing debt. Ongoing cash payments and stock combined with NBC’s highly profitable well-managed assets makes for a very strong bidding alternative. NBC will generate $2 billion in operating income for GE in 2003 on $7 billion in revenues, and remains a strategic growth platform for GE, analysts say.
“This is a long shot for us,” Mr. Wright told me this week. “We need more scale. These assets are unique. There are not many of these around. This is the first time we’ve had the chance to look at [a studio] up close. They are fairly conservative.”
“This is an opportune moment for us,” Mr. Wright said, but it is not a do-or-die situation for NBC.
Even if NBC loses the bid for VUE to Liberty, it has several key fallback positions for remaining involved to create more value and scale for itself and VUE’s new owner. Sources say NBC also could pursue MGM, another VUE bidder that has essentially put itself in play.
But don’t be surprised if Liberty emerges as the buyer of VUE and then finds a way to bring NBC into its newly formed entertainment entity through some kind of creative alliance or joint venture.
Sources say that although Liberty would want ownership control of a new entertainment entity it creates, the two companies have a long, productive history of working together. For instance, Discovery programs NBC’s Saturday morning block.
“There is some element of possibility, but very little element of probability at this time, since we and Liberty are bidding for the same assets,” Mr. Wright said.
“If we don’t get this [VUE], we’ll look at any Liberty proposal as a fresh situation. But there is no connection between what we are doing with Vivendi and what we might do with Liberty,” he said.
Earlier this year, sources say, Mr. Wright spoke with Mr. Malone about establishing such a strategic partnership if Liberty were successful at bidding for DirecTV and NBC were successful at winning the VUE assets. Although Liberty withdrew from the bidding, both Liberty (a 20 percent owner of News Corp.) and NBC have discussed establishing similar partnerships with News Corp.’s Fox Entertainment Group, which is expected to acquire a 34 percent controlling interest in DirecTV by year-end. Mr. Wright declined comment.
In endless, complex ways, NBC and Liberty are destined to continue working together because they seek the same scale and asset clout to survive and thrive in a consolidating media world.
The companies also share a common ally in Barry Diller, whose complicated legal ties to Vivendi Universal provide Liberty a negotiating edge in the VUE auction since Liberty is a large shareholder in both Vivendi and Mr. Diller’s InterActive Corp. (formerly USA Interactive). Mr. Diller and Mr. Wright came very close to securing a merger of their companies several years ago, which was foiled by Edgar Bronfman Jr., who controlled Mr. Diller’s company at the time and is one of the current bidders for VUE.
Mr. Malone and Liberty are in a position to legally untangle and free Vivendi from its obligations and the Vivendi stakes owned by Mr. Diller and InterActive Corp., which could block any sale of the VUE assets. Those stakes are valued at a minimum of $2.3 billion.
“From their [Vivendi’s] point of view, we can provide them with a couple of billion [dollars] of liquidity that nobody else can,” Mr. Malone recently said in describing what is one of his classic deal strategies. “And Barry can help free them from their obligations to him.”
Liberty also has many other strategic chips it can play to indirectly facilitate a VUE deal.
For instance, Liberty also is positioned to acquire the 57 percent stake in QVC it doesn’t already own from Comcast Corp., providing Comcast with much-needed proceeds to reduce its debt and a way to resolve a license fee dispute with Liberty’s Starz Encore. Then Liberty could merge QVC with InterActive’s HSN home shopping rival.
“We would rather have more consolidated operating businesses we can use to drive value where we are able to access the cash flow so we have renewable sources of cash flow that would help support our debt and other activities as well as being a platform off of which we could grow other businesses,” Liberty President and CEO Robert Bennett recently explained.
Metamorphosis
Analysts say Liberty’s bid for VUE dashed interest in bidding for DirecTV and its ardent interest in doing strategic alliances with NBC and others is all part of its goal to become “a one-stop shopping solution” in the digital media age. And it has the financial and strategic connections to make it happen.
Merrill Lynch analyst Jessica Reif Cohen estimates Liberty could acquire Vivendi Universal’s 86 percent stake in VUE for nearly $19 billion (which includes assumed debt of $4 billion) and Comcast’s 57 percent stake in QVC for $7 billion. In the first bidding round, sources said, Liberty included more than $5.5 billion in cash-an important component to Vivendi, which needs to pay off debt.
Liberty would finance these acquisitions largely by liquidating its nonstrategic equity securities (in companies such as AOL, Sprint PCS and Vivendi) and its $5.3 billion in cash reserves.
Once Liberty completes its own immediate metamorphosis, its annual consolidated revenues would jump from a current $2.1 billion to about $13 billion and its annual earnings before interest, taxes, depreciation and amortization would grow from a current $445 million to an estimated $2.6 billion, with annual free cash flow of about $500 million, Ms. Cohen said.
Analysts estimate Liberty could gather together as much as $20 billion in acquisition cash and securities, which includes $9 billion in nonstrategic equity assets it says it is willi
ng to liquidate.
While the fate of the VUE assets continues to hang in the balance, at least one thing seems clear. In endless, complex ways, NBC and Liberty are destined to continue working together because they seek the same scale and asset clout, and compatible-although also competing-interests.
The kind of enterprise and upside NBC and Liberty bring to the table in whatever deals they do will have daunting ramifications for all other media players.